Small Business

The small business owner’s guide to equipment financing

Whether your business is product or service-based, the right equipment is essential to maintain operations and spark new growth. Equipment financing, or equipment loans, allow you to finance up to 100% of the cost of the equipment that you need to operate and scale your business.

A common misconception about equipment financing is that you can only use it to purchase the types of massive machinery that you might find on a construction site, but in actuality, “equipment” can refer to items across various industries at multiple price points. Office equipment, restaurant supplies, delivery vehicles, tractors, and forklifts are just a few common examples.

Take advantage of equipment loans to purchase the tools you need without putting a huge strain on your cash flow.

How does equipment financing work?

Equipment financing is designed specifically for the purchase of business equipment. Your business makes payments toward the amount you borrowed over time, and once the debt is repaid, you own the equipment free and clear.

Equipment loans are often easier to qualify for than other financing options. This is because the amount of money you’re eligible to borrow is based largely on the type of equipment you’re planning on purchasing, rather than being tied solely to your credit score and business financials. And because the equipment you’re purchasing is usually used to secure the loan, it’s unlikely you’ll be asked to put up any additional collateral, such as a home or business assets.

Equipment financing rates & terms

Equipment loans can vary from lender to lender, which is why it’s so important for you to compare your options.

Interest rates can range from 5% to 30%, and the requirements around money down, credit score, and business financials can vary.

Generally speaking, small business owners with better credit scores and larger down payments will see lower interest rates, whereas borrowers with lower credit and less money down tend to see higher rates.

The typical repayment term for a non-SBA equipment loan is one to five years, but there are some lenders who provide 10 year repayment terms. Generally, small business owners will see the best rates and longest terms through a traditional bank, or with an SBA loan. The downside to bank financing, and one of the reasons why many business owners turn to Funding Circle and other alternative lenders, is that banks typically take a long time to approve or deny your application, require extensive paperwork, and tend to approve a smaller percentage of applicants than alternative lenders.

A different kind of equipment financing

Advantages of equipment financing

1. Less documentation

The process of applying for bank financing is often lengthy and opaque. When you apply for traditional small business loans, the lender will often want to see a few years of your financial history to make sure you’re running a profitable business. In addition, lenders typically require that you have a decent credit score and lots of supporting documentation.

Because equipment loans are often secured by the piece of equipment that’s being financed, lenders are usually able to underwrite the application with fewer documents. Oftentimes, the lender will only require basic personal and business information, an invoice for the equipment, and three to six months of business bank statements.

2. You don’t need to have a big chunk of cash on hand

Whether you’re investing money back into the business, offering raises or bonuses to your staff, or simply running a lean operation, you might not have enough cash to buy the equipment you need. Equipment loans typically allow you to finance 80 to 100 percent of the cost of equipment, often with no down payment. In certain instances, the payments on equipment loans may even be tax deductible as operating costs.

3. Stay competitive with the best equipment

Sometimes you need new business equipment because something breaks down and the repair rival or outweigh the cost of buying new. Other times, the technology in your industry has evolved and new equipment is needed to stay competitive. Either way, best-in-class equipment can help youproduce more products, better serve your customers, and ultimately grow your bottom line.

4. Preserve working capital and improve cash flow

The ability to maintain a healthy cash position is one of the biggest benefits of equipment financing. Preserving your working capital for other strategic purposes such as hiring much-needed help or marketing ahead of your busy season is often a better use of capital than using that cash to buy the equipment outright.

5. Fast approval times

Non-traditional lenders like Funding Circle are able to approve or deny your loan application very quickly. If approved, money can be in your account in as little as 10 days. When dealing with crucial equipment for running your business, time is often an enormous factor in the decision making process.

Who qualifies for equipment financing?

Most businesses qualify for equipment financing loans.

However, the amount that you’re able to borrow, as well as your interest rate, depends on the price of the equipment, your personal and business credit score, and the financial health of your business.

Equipment loans are often good options for people with less-than-perfect credit because the equipment acts as collateral, which allows the lender to be a bit more flexible.

Common use cases for equipment financing

Many small business owners hear equipment financing and think of heavy equipment financing, used on large construction sites or vast farmland. Yes, industrial and construction equipment is financeable, but there are many other use cases beyond what comes to mind initially. The truth is, small business owners in just about every industry can leverage equipment financing to support their growth. Whether you’re big or small, simple or complex, equipment financing can help.

Below are a few common uses cases for equipment financing. The list is by no means all-encompassing, so don’t be discouraged if you don’t see your industry or use case. You should still explore to see if equipment financing is right for your business.

Industrial equipment financing

“Industrial” can be a bit confusing because it’s such a broad term and is used to describe a wide variety of businesses. However, when people discuss industrial equipment, they’re usually referring to large and expensive equipment, often used in fields like manufacturing, construction, or agriculture.

Common use cases for financing industrial equipment:

Bulldozers

Cement mixers

Conveyors

Cranes

Excavators

Forklifts

Graders

Threshers

Tractors

Wheel loaders

Workbenches

Solar panels

HVAC units

Gym equipment financing

The explosion of the fitness industry over the last few years has led to a surge in the number of new gyms, boutique studios, and specialty classes. Top-of-the-line equipment is required for gyms to stay competitive in this market. Financing your fitness equipment allows you to scale operations without putting an enormous dent in your working capital.

Restaurant equipment financing

In the world of hospitality, there is no shortage of equipment needs. Whether you want to give your kitchen a complete overhaul, replace aging machinery, or update fixtures, an equipment loan can help you get it done, and fast.

Common use cases for financing restaurant equipment:

Point-of-sale systems

Commercial ovens

Grills

Deep fryers

Freezers

Food processors

Refrigerators

Coffee makers and espresso machines

Food trucks

Delivery vehicles and trailers

Medical practice equipment financing

Innovation in the medical field is almost always welcome for patients and doctors alike, but keeping up with the high costs of new equipment can put a real dent in your cash flow. Financing medical equipment allows you to maintain and grow your medical practice while providing the best patient care.

Common use cases for financing medical equipment:

Dental equipment

Physical therapy equipment

Medical lasers

Wheelchairs

Diagnostic equipment

Imaging equipment

Dermatology equipment

Chiropractic equipment

When equipment financing isn’t the right option for you

In some cases, another form of financing might be more suitable for your business, like a term loan or line of credit. Below are a few situations in which equipment financing may not be the best option:

1. You’re unable to cover the down payment

Not every business that qualifies for an equipment loan receives 100% of the cost of the equipment from the lender. In certain instances, a finance company will supply 80% of the equipment value, and the borrower will have to supply the remaining 20% in cash. If the additional cash required is prohibitive, it might worthwhile to look into leasing companies.

2. The cost is too high

Similar to other small business loans, you will need to pay interest on the money you borrow. Your interest rate depends on a few factors, including your credit score, time in business, and annual revenue. However, it’s important to note that unlike other forms of financing, the annual percentage rate, or APR, in equipment financing is often determined by the resale value of the equipment rather than your company’s financials. This may benefit small business owners with less-than-perfect credit because they can still access capital. However, business owners with terrific credit may want to compare their options.

3. The equipment in your industry becomes outdated quickly

Before you decide to finance any equipment purchases, it’s essential to research how the item typically retains value over time. You’ll want to avoid financing a piece of equipment that will be obsolete by the end of your loan’s terms. If you work in a field where there is fast-paced innovation, you may want to consider leasing as an option.

Equipment leasing vs. financing: what’s the difference?

We’ve already established the benefits of leveraging equipment financing to grow your business. However, leasing is another common option that should be considered when you are interested in new equipment, but don’t have the cash to buy it outright or aren’t able to qualify for a equipment loan.

Here’s a bit more about the difference between leasing and financing.

How equipment leasing works

When you lease equipment, you’re essentially renting it the same way you would an apartment or car.

Unlike a traditional loan, leasing companies do not require that you put any money down. Generally, you’re not bound by any collateral, lien, or personal guarantee requirements. At the end of the lease, you usually have the option of simply returning the equipment, renewing the lease, or buying it for fair market value.

The biggest disadvantage to leasing is that it can be significantly more expensive than simply purchasing the equipment outright through an equipment loan. It may feel as though you’re saving money initially, but when you look at the long term cost, it’s less appealing.

That said, if your business is expanding rapidly and you can handle the added cost, or if you’re in a field that has high equipment turnover, leasing may be a good solution for your business.

Equipment financing from Funding Circle

Another option for financing equipment purchases is through a term loan with Funding Circle. Choose Funding Circle when you need to lease or purchase big-ticket equipment for your medical practice, construction firm, or other type of business. With Funding Circle, you can count on:

Competitive rates – starting at just 4.99%

Exceptional service – you’ll get your own dedicated account manager to answer all your questions

A fast and easy application process – get a decision in as little as 24 hours after document submission

Frequently asked questions

Why should I finance equipment through Funding Circle as opposed to a bank or other lender?

The underwriting process at traditional banks can be lengthy, confusing, and opaque. At Funding Circle, we’ve taken the best parts of an SBA business term loan — like fixed and affordable once-monthly payments and no prepayment penalties — and created something faster and more flexible. Unlike traditional lenders, we also deliver a best-in-class and transparent experience to our business customers. You’ll work with a dedicated loan specialist who will guide you through the entire application process and remain focused on meeting your unique financing needs.

How long does it take to apply for a term loan through Funding Circle?

Funding Circle’s application process is quick, easy, and transparent. You can apply for a business loan and get your free instant quote in just 10 minutes, and have the money in your bank account in as few as 10 days.

What documentation is required with my Funding Circle application?

Most recent 2 years of business tax returns

Most recent personal tax return

Most recent 6 months of business bank statements

Signed guarantor form for any owner with 20%+ ownership of the business

Are your loans secured?

Yes, all of our loans are secured.

Do I need to have collateral, and if so, what would be acceptable collateral for a loan?

We require a lien on your business assets and a personal guaranty from the primary business owners. We have no rigid guidelines regarding collateral; equipment, accounts receivable, and cash savings or deposits can all be used as collateral.